Housing is considered a bright spot in the U.S. economy. But the fiscal cliff – over $600 billion in tax and spending provisions set to expire at the end of the year – could deliver a blow the housing recovery. Bank of America’s Michelle Meyer writes that the hosing market is exposed to the cliff in two ways.
First, policies that impact growth and that could potentially send the economy in to a recession or create uncertainty could weigh on housing demand and construction.
Second, policymakers also need to hash out how they intend to support the housing and mortgage market.
“Tax policies for housing and the government’s role in the mortgage market are up for debate. The biggest concern is removing or reducing the mortgage interest tax exemption, which costs the Treasury about $80bn a year. Homeowners with a mortgage can deduct interest payments from household income if they chose to itemize allowable expenses. If homeowners do not itemize, they can take the “standard” deduction, which is up to $11,900 for couples and $5,950 for singles. About two-thirds of the population takes the standard deduction.
Those who chose to itemize have large mortgage payments and/or other deductions such as charitable contributions; this mostly captures the upper income cohort. Of those who itemize deductions, 90% earn more than the median income.1 This means that if the mortgage tax deduction was removed or phased out it would hit the higher priced markets disproportionately. Home prices would have to adjust lower as effective mortgage payments would be higher.”
Meyer doesn’t anticipate any changes immediately but expects them to be part of the ‘grand bargain’. She thinks the high-priced housing market would be most affected.
She projects that home prices will increase 3 per cent in 2013, and that housing starts will increase 25 per cent to an average of 975,000.